Real estate links sustainability and shareholder value

24 Oct 2013

Real estate investors are getting greener and they’re keen to show it. Recognising that environmental, social and governance performance can boost buildings’ rents and values ― optimising the balance between risk and return ― growing numbers of real estate companies and fund managers are incorporating sustainability practices into day-to-day decision making and due diligence.

Energy consumption and greenhouse gas (GHG) emissions in buildings are, consequently, falling fast. The 2013 Global Real Estate Sustainability Benchmark (GRESB) Report, published in September, shows a clear trend of improving sustainability performance.[1] What’s more, a growing number of property companies and fund managers are eager to demonstrate their sustainability credentials, as more property investors than ever participate in the survey.

But while the trend is improving, there are leaders and laggards. Australian real estate investors lead GRESB’s ranking of best practice, as government policy has reinforced market forces. GRESB’s Australia and New Zealand region, dominated by Australian companies, achieves GRESB ‘Green Star’ status, the highest ranking, on a regional basis. Asia fares least well, with only 22% of companies rated ‘Green Star’. European and US companies rank in the middle.

A rising sustainability trend

Now in its third year, the GRESB survey is attracting mounting participation, reflecting real estate investors and asset managers’ increasing focus on sustainability. In 2013, the number of survey participants rose more than 20% to 543, owning 49,000 assets, with a total value of US$1.6 trillion. This number is up from 443 participants, with 36,000 assets, valued at US$1.3 trillion in 2012.

As real estate owners and tenants take steps to enhance the efficiency of building operations, they’re being rewarded by improvements in sustainability performance. The survey shows energy consumption falling by 4.8% compared with the previous year, based on like-for-like data from 319 property companies and funds. GHG emissions fell by -2.5% and water consumption by -1.2%.

North American companies have made the most progress in the year under review. They decreased energy consumption by 1,235 GWh (-6.6%) and GHG emissions by 317,600 metric tonnes (-4.8%). In Europe, the improvement in energy consumption and GHG emissions was only marginal, with decreases of 49,600 MWh (-0.7%) and 19,300 metric tonnes (-0.2%) respectively.

Overall, the trend is clearly improving, as real estate companies progress from putting in place plans and policies for managing sustainability, to actually taking steps that improve their portfolios’ sustainability performance. So GRESB now rates 22% of survey participants as Green Stars, up from 19% in 2012. Less than 30% are ‘Green Starters’, down from 40% in 2012.

How to improve?

More than 50 institutional investors, representing on aggregate US$6.1 trillion of institutional capital, now use the benchmark results in various stages of the investment management and engagement process, with the clear goal of optimising the risk/return profile of their real estate investments. But while the evolution towards real estate sustainability is evidently fairly mature in Australia, in other parts of the world real estate owners still have a lot to do before they might hope to claim a ‘green premium’. GRESB’s rates seven areas of sustainability performance give a high-level guide to what can be done:

Stakeholder engagement – engage with employees, tenants/occupiers, external service providers and the community.

GRESB’s report highlights ‘best practices’ in all seven areas. Such practices range from one asset manager’s long-term plan for each property detailing how sustainability measures will be embedded into the asset lifecycle, through to the real estate company that analyses certification systems to see how to implement them in ways that deliver the greatest benefits to customers without higher costs.

The global real estate industry’s uptake of sustainability integration has considerable momentum, offering an unprecedented opportunity to connect the worlds of conventional and responsible investment. Improvements in sustainability performance are becoming ever more closely linked to the goal of enhancing and protecting shareholder value.

From July 1, 2013 onwards PwC has reviewed the GRESB Survey, GRESB’s data management and verification processes, the scoring methodology and data analysis process, and the reporting process. The outcomes from this review will be assessed by GRESB during the fourth quarter of 2013 with a view to incorporating PwC’s recommendations in the 2014 Survey year. PwC has also been a member of the survey Benchmark Committee since July 1, 2013.